As the Financial Conduct Authority (FCA) calls on the funds industry to define and articulate the extent to which it demonstrates value as part of its asset management market study, two concerns seem to permeate initial responses: consistency of interpretation between groups and actual, practical use and appreciation by end investors.
Rathbone Unit Trust Management (RUTM) chief executive Mike Webb said he thought the requirement was set to dominate the press over the coming months, with annual value statements being required from 30 September. As outlined in the final rules and guidance from the FCA asset management market study published in April 2018, non-executive directors will be responsible for conducting the assessment.
Value is such a subjective term, the concept of clearly defining, measuring and then articulating that in way that is relevant and suitable for all unit holders in a fund, across different client banks will prove challenging, to say the least.
Blackrock said it was actively working on the reporting requirement. A spokesperson said it was assessing the Investment Association’s standards and framework, set by the IA’s working group, and applying as appropriate.
Portfolio Adviser put in calls to 10 fund groups plus the Investment Association over the past few days to try and garner a sense of what criteria are being considered, even if nothing yet has been ultimately decided six months ahead of a regulatory deadline, in the decision-making process. At the time of writing, just one was able to provide a meaningful response, on the proviso of remaining anonymous.
The age-old ‘rules not guidance’ approach of the FCA means that, as ever, the requirement is open to interpretation.
Consistency of performance
As Darius McDermott, managing director of FundCalibre said: “It is a challenge. An active UK fund manager has a job to beat their chosen FTSE index, but they are not going to do that every year – the law of averages dictates that. So how do they choose the timeframe over which they show value – one year, three years, five years?”
He said of the 300-odd UK equity funds available, “at least 40% are consistently poor performers”, yet with roughly the same charges across the board, one consequence of the value statements should be that the fees come down in cases of consistent poor performance.
Will a result of value statements then result in a situation where consumers can, effectively, choose the Waitrose luxury or the Lidl basics equivalent of funds?
As the aforementioned sales director told me: “It’s not just about the highest alpha targets. If people believe in active management then even the hope of outperforming a benchmark after fees, even by a modest amount of 1%, compounded after 30 years can be honestly said to be value for money.”
But promise-versus-delivery then comes into play, as he continues: “If they have signed up to 3%-5% though, and only get 1% then that is less value for money and then one needs to look at the fee implications of that.”
If the requirement is to demonstrate value, and each group is left to set their own definitions of value, will that not simply adopt the same rulebook as has historically been a concern with benchmarks, where groups set hurdles that are easier to clear?
Willis Owen’s head of personal investing Adrian Lowcock said: “I can’t really see any fund groups coming out and producing a statement that says they don’t add value. But I think this will serve to keep groups focused on what clients will see as performance and outperformance relative to an index, whether that outperformance is net of fees, and will support transparency across the industry.”
He added that mandating of the value statement should help to clean up the closer trackers that are all-too prevalent. It will be interesting to see the extent to which the regulator uses these as an audit on funds to force closures of consistently underperformance, or whether, now being spelled out in no uncertain terms, market forces will lead to contraction of the fund universe.
The IA says it is working with the regulator and its members on implementation.
Chief executive Chris Cummings says its important to improve the clarity with which fund objectives, benchmarks and performance are communicated to savers and investors. “Our customers should be able to easily compare fund information, so that they can choose investment products best suited to their needs.”
Will investors welcome the value assessment?
Certainly, the jury seems out on whether end investors welcome, or even understand, the additional information they are being offered. As my sales director said: “Or are they just concerned with whether their portfolio valuation is higher or lower than it was a year ago.”
He went on to say another major factor being considered by his own group were risk and drawdown.
“It is not yet finalised internally, but some of the conversations taking place are looking at delivering rolling alpha over three to five years, while also noting the risk being taken in order to achieve that, so also looking at drawdown because capital preservation is as important.”
He added it was important to compare those with passive funds, and consider their own construction over issues such as levels of replication, or how they manage drawdown.
“It’s all very well looking at the upside, but if you are going to give your clients 100% of the downside when markets fall, then that has a negative value connotation to it.
He said with outcomes-based investing, it was far easier to define, with an income requirement of 4%-6% over a rolling three-year period, for example, if delivered somewhere in that rage, net of fees, the outcome has been met and the client ought to be satisfied that offering is giving them value for money.
There are also softer issues such as quality of client service, ‘added value’ offerings such as investment insight and marketing that might be taken into consideration. It’s often those less-tangible benefits that will set the great apart from the good (other things being equal) but if they are less measurable then likely won’t be factored into a value statement, pushing the industry back to square one.